Discuss the methods to determine the size of the advertising budget.

Discuss various methods of advertising budget.

What is advertising appropriation? How the size of advertising budget is prepared? Explain.

Explain advertising appropriation.

Ans.

Advertising Appropriation

Every manufacturer sets apart a sum of money to be spend an advertising which is referred to advertising appropriation. The amount is not fixed arbitrarily but is determined an some scientific basis. Following are the methods of appropriation for advertising or determining the size of the advertising budget.

1. Availability of fund approach,

2. ROI method,

3. The objective and task approach,

4. Judgement method,

5. Percentage on sales method,

Methods of Appropriation

These are as under:

1. Availability of Fund Approach: Under this approach total funds available are considered. The concern has to decide how much funds can be afford. The company forecasts his sales. Under this approach it is assumed that advertising is a residual activity.

2. ROI Method: Under the ROI i.e. return on investment method advertising expenses are treated as an investment. It is a scientific method of approaching the problem. This method correlates the profits and sales created by advertising.

3. The Objective and Task Approach: This is goal-oriented approach. This approach is most desirable approach. It involves following steps:

(i) Goals should be defined by the organisation.

(ii) Amount and type of promotional activities should be determined.

Merits – These are as under-

1. In the introduction of a new product task approach keeps special advantage.

2. It is a scientific method where appropriations are made as per the requirements of the firm, setting the objectives and activities.

Demerits – These are as under –

1. It requires careful setting up of advertising objectives, which guides different tasks and the design of advertising appeals. If objectives are ill-defined, the whole expenditure and the efforts go waste.

2. Under this method it is to determine the cost of fulfilling on objective. This method is difficult to implement as it needs a detailed planning.

4. Percentage on Sales Method: Under it the amount to be appropriated to advertising is arrived by multiplying to value of past year’s sales or the projected sales for the budget period. Different percentage may be fixed for different territories, markets, products etc.

Advantages: Following are the advantages of this method –

1. This technique is simple, workable and safe.

2. The advertising appropriation fluctuates directly with sales.

3. The per unit advertising cost, sale price and profit are correlated.

Disadvantages: These are as under –

1. Under this method percentage on sales is determined arbitrarily. It is not scientific.”

2. In many cases advertisement fails to generate sale.

3. This methods would be in appropriate if advertiser launches a new product.

4. Long-term advertising programme concept be prepared.

5. Judgement Method: Under this method suggestions are invited from experienced managers. Over the years managers develop a feel for the market keeping objectives of the concern. Manager can take best judgement and he can also decide the advertising budget at a lump sum figure keeping in view all present position. This method is based upon the experience and judgement.

This is a simple method. It does not take more time. However more reliance an guesses may present misleading judgement.

6. Affordable Method – As per Affordable method advertising budget is appropriated after all the other unavoidable investments and expenses have been appropriated. Under this method the appropriation is set simply on the basis of an assessment of what the advertiser can afford for advertising purpose. Example – when it is decided that 10,000 should be added every month to the fundamental advertisement expenditure of 1,00,000, this would be an acceptable preposition if the sales are increased by 10,000 or more per month.

If the sales do not increased proportionately, the additional expenditure are not incurred.

Demerits – These are as under –

1. This method does not help in long-term planning.

2. The short-term objectives are ignored.

3. The affordable amount cannot be predicted.

4. It is illogical and non-quantifiable method.

5. When the sales of the advertiser decline, the size of the budget can be slashed. It may lead to the emergence of the laggard situation.

6. It is not a scientific method.

7. It does not allocate the funds for advertising fully taking into account the likely contribution.

8. This approach ignores the need significance, nature of advertisement and some relevant factors.

7. Comparative Matching of Parity Approach – The firm that uses this method will tie its advertising budget to the rupees or percentage of sales expanded by its competing firms. Firm will prepare the advertising budget in such a way that firm is on par with the competitors. Firm will spend as much as the competing firm do. Competitive matching of parity method is based on the assumption that competitors have similar problems.

Merits – These are as under –

(i) Recognising the Significance of Competition – This approach provide the benefit of recognising the importance of competition in the market.

(ii) Increase in Shares in the Market – This approach enables the firm to maintain or increases its market share.

(iii) A Red Flag to Budgets – Budget comparison with that of competitors can act as a red flag to budgets which are meagre or excessive.

(iv) Rational Approach – This approach is a rational approach as the amount of budget is determined in the same market conditions, for the same market opportunities and pursuing the same media.

(v) Minimizes Aggressive Actions and Advertising Wars – Competitive matching of parity approach is used to maintain the collective wisdom of the industry and reduces aggressive action.

(vi) Monitoring the Marketing Programmes of Competitors – Competitive matching of parity method enables the management of the firm to monitor the marketing programmes of competitors. Firm assesses the advertising efforts of major competitors and the industry as a whole.

Demerits – These are as under –

(i) The competitive parity ignores the level of production and marketing, which have a significant bearing on the budgeting process of the firm.

(ii) The imitator may cannot be able to afford the budget of the competitive firm.

(iii) The firm imitating competitive matching of parity method ties itself up with the competing firm budget.

(iv) Firm, which uses this approach, may face several risks such as –

(a) It is not an easy task to estimate the competitor’s budget.

(b) Firm cannot get the essential information about the competitor’s budget.

(d) If only partial information is received, this approach may be misleading by non-indicating total efforts.

(v) In competitive parity approach, it is assumed that competitors are always on the right path. But it is never true as every firm is unique in its objectives and problems. Firm’s objectives, objectives of advertising, opportunities, resources etc. can never be similar.

(vi) Competitive matching of parity method may ignore the needs for analysing the realities.

8. Marginal Approach – In estimating the cost per unit, the costs of advertising, the marginal contribution of each unit of each media is a guiding factor. The cost of advertising should be, at least, equal to its benefits.

The marginal analysis is done to get optimum level. The marginal costs and marginal benefits should be equal in deciding the optimum level of advertising. The total cost will be determined at that point of time and benefits will be determined on the basis of sales.

The marginal approach of budget allocation gives a regional solution to determine the size of the appropriation and allocation for funds.